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Summary

  • A leader and an innovator in the high-growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions.
  • Recurring income for Q1 '14 vs Q1 '13 was up 38%.
  • Q1 '14 11% adj. post-tax profit margin.
  • 6.8 times sales, P/E of 61.

Based in Draper, UT, HealthEquity (NASDAQ:HQY) scheduled a $100 million IPO on the Nasdaq with a market capitalization of $546 million, at a price range midpoint of $11, for Thursday, July 31, 2014.

The full IPO calendar is available at IPOpremium

SEC Documents

Manager, Co-Managers: J.P. Morgan, Wells Fargo Securities

Joint Managers: Raymond James, Baird, SunTrust Robinson Humphrey

End of lockup (180 days): Tuesday, January 27, 2015

End of 25-day quiet period: Monday, August 25, 2014

Summary

HQY is a leader and an innovator in the high-growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions.

Valuation

Glossary

Valuation Ratios

Mrkt Cap ($mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Annualizing Jan '14 qtr.

HealthEquity

$546

6.8

60.6

6.5

9.9

18%

Conclusion

The rating is buy.

HQY's recurring income for Q1 '14 vs. Q1 '13 was up 38%

6.8x sales, P/E of 61

Q1 '14 11% adj. post-tax profit margin

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

HQY is a leader and an innovator in the high-growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions.

HQY's platform provides an ecosystem where consumers can access their tax-advantaged healthcare savings, compare treatment options and pricing, evaluate and pay healthcare bills, receive personalized benefit and clinical information, earn wellness incentives and make educated investment choices to grow their tax-advantaged healthcare savings.

HQY can integrate with any health plan or banking institution to be the independent and trusted partner that enables consumers as they seek to manage, save and spend their healthcare dollars.

HQY believes the secular shift to greater consumer responsibility for healthcare costs will require a significant portion of the approximately 175 million underage 65 consumers with private health insurance in the United States to use a platform such as HQY.

The core of HQY's ecosystem is the HSA, a financial account through which consumers spend and save long term for healthcare on a tax-advantaged basis.

Customers

HQY is the integrated HSA platform for 20 of the 50 largest health plans in the country, a number of which are among 28 Blue Cross and Blue Shield health plans in 26 states, and more than 25,000 employer clients, including industry leaders such as American Express Company, Dow Corning Corporation, eBay, Inc., Google, Inc., Intermountain Healthcare and Kohl's Corporation. HQY's customers include individuals, employers of all sizes and health plans.

Through its existing network partners, HQY has the potential to reach over 55 million consumers, representing approximately 30% of the underage 65 privately insured population in the United States. As of June 30, 2014, HQY has over 1.0 million HSA members, representing over 2.3 million lives. During the years ended January 31, 2014 and 2013, HQY added 306,000 and 216,000 new HSA members, representing approximately 700,000 and 500,000 lives, respectively.

Differentiated focus

HQY developed technology and a differentiated focus on the consumer to facilitate the transition to a more consumer-centric approach to healthcare saving and spending.

In an environment where consumers own greater responsibility for cost, they require better information, a more integrated experience, a customer service model that is similar to other consumer businesses and the ability to make their dollars and data portable.

By integrating healthcare saving and spending with the broader healthcare system, HQY is breaking down the wall between personal finance and healthcare, and enabling consumers to make the transition to a consumer-centric healthcare environment.

Dividend Policy

HQY's board of directors has declared a special cash dividend in an aggregate amount of $50,000,000, payable on shares of its common stock outstanding on the business day immediately prior to the closing date of the IPO

The dividend will not be paid on any shares purchased in this offering.

Intellectual Property

HQY has registered its trademark "HealthEquity" with the U.S. Patent and Trademark Office, and maintains trademark rights to the mark "Building Health Savings."

HQY also relies on other forms of intellectual property rights and measures, including trade secrets, know-how and other unpatented proprietary processes, and nondisclosure agreements, to maintain and protect proprietary aspects of its products and technologies.

HQY requires its employees and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with it.

Competition

HQY's direct competitors are HSA custodians, of which there are over 2,200 currently competing in the market.

These are primarily state or federally chartered banks and other financial institutions, for which HQY believes technology-based healthcare services are not a core business.

Certain of HQY's direct competitors have chosen to exit the market, despite increased demand for these services.

This has created, and HQY believes will continue to create, opportunities for HQY to leverage its technology platform and capabilities to increase its market share.

However, some of HQY's direct competitors are in a position, should they choose, to devote more resources to the development, sale and support of their products and services than HQY has at its disposal.

In addition, numerous indirect competitors, including benefits administration technology and service providers, partner with banks and other HSA custodians to compete with HQY.

HQY's health plan partners may also choose to offer technology-based healthcare services directly, as some health plans have done. HQY's success depends on its ability to predict and react quickly to these and other industry and competitive dynamics.

5% stockholders

Berkley Capital Investors, L.P. - 36.8%

Financial Partners Fund I, L.P. - 10.0%

Neeleman Holdings, L.C. - 5.9%

Use of proceeds

HQY intends to use the $90 million in proceeds from its IPO as follows:

To pay a previously declared cash dividend of $50 million on shares of its common stock outstanding on the business day immediately prior to the closing date of this offering (after giving effect to the conversion of all of its outstanding convertible preferred stock and redeemable convertible preferred stock into shares of common stock).

HQY's executive officers, directors, beneficial owners of 5% or more of its outstanding shares of capital stock and affiliated entities, will receive approximately $27.3 million, or 54.5%, of such dividend amount; and

To pay a cash dividend of approximately $345,000 on shares of its outstanding series D-3 redeemable convertible preferred stock accrued through the date of conversion of such shares into common stock, which will occur on the business day immediately prior to the closing date of this offering.

HQY's executive officers, directors, beneficial owners of 5% or more of its outstanding shares of capital stock and affiliated entities will receive approximately $330,000, or 95.5%, of such dividend amount.

Disclaimer: This HQY IPO report is based on a reading and analysis of HQY's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: IPO Preview: HealthEquity